“No need to wait for a new bullish cycle:” what will happen to the crypto market during the earnings season

Consumer inflation data and the start of the second-quarter earnings season could be two catalysts for swings in the markets this week. The publication of the reports could set the tone for how aggressive the US Federal Reserve System (Fed) will be in its fight to curb price increases.

The June Consumer Price Index (CPI) is projected to rise, and economists expect it could be higher than May's 8,6% annualized rate. Investors are assessing whether the US economy can avoid a major recession as the Fed raises rates to fight the strongest inflation in decades.

The answer to that question should have a direct impact on markets. Analysts agree that an economic slowdown combined with weak corporate earnings could cause the S&P 500 Index to decline by at least another 10%, compounding losses that have already seen it fall 18% since the beginning of the year.

The S&P 500 stock index basket includes 505 stocks of the 500 largest-cap publicly traded companies on US stock exchanges.

Inflation data will follow Friday's jobs report. Many experts share the idea that the Fed could raise rates another 75 basis points later this month. A basis point is one hundredth of a percentage point. The key question for the markets is when inflation will peak, as it is already continuing to rise much longer than the Fed originally anticipated.

“Most analysts expect U.S. consumer price growth in June 2022 to accelerate to a record, I would even say crazy 8,8%. This is the maximum value for the last more than 40 years,” Roman Nekrasov, co-founder of ENCRY Foundation, who also holds to the prediction of the Fed raising the interest rate at once by 75 b.p., analyzes the situation.

In his opinion, it will lead to the growth of the yield of treasury bonds as one of the most low-risk assets in the world. In such a scenario, those investors who would like to increase the share of low-risk investments in their portfolios without a significant loss in yield would begin to move assets into treasury securities. “Thus, capital will start to flow out of high-risk assets. Such assets include stocks, as well as cryptocurrencies,” the expert concludes.

This week also marks the start of the earnings season for the second quarter. The publication of corporate earnings data could be a source of some market turbulence if analysts are forced to cut their annual balance sheet estimates.

PepsiCo will report earnings on July 12, Delta Air Lines — on July 13. JPMorgan Chase and Morgan Stanley open the bank reporting season on Thursday, and Wells Fargo, Citigroup and PNC Financial, among others, follow on Friday. By July 29, more than 70% of the S&P 500 will report second-quarter results. The condition of companies, especially US large corporations, plays an important role in the major indexes.

The S&P 500 earnings are expected to rise 5,7 percent in the second quarter, according to data from Refinitiv. Estimates for the third and fourth quarters are down slightly, but still at 10,9% and 10,5%, respectively.

According to Sergey Mendeleev, CEO of InDeFi Smart Bank, the reports traditionally will not have a serious impact on the markets, unless it is a massive drop in profits that will affect the industry indices. The market will be more influenced by US inflation data. “Even if inflation turns out to be in the predicted 8,8% zone, that's already a record, and we could be in for another 0,5% rate hike right away. And if it turns out to be a little higher, it's already 9% and a guaranteed dump for all markets,” Mendeleev warns.

Since 2020, the correlation between stock prices and crypto assets has increased significantly. While bitcoin's returns did not correlate with stock market performance on average during its first decade, this correlation quickly increased with the COVID-19 pandemic.

“The cryptocurrency market does have some correlation with the stock market, but I can't call it obvious,” states Gleb Jout, head of Bitget CIS, “Nevertheless, in the current situation, the stock market does have an impact on the digital currency sector, so the cryptocurrency market will remain volatile in the next few weeks.”

The correlation coefficient between bitcoin and the S&P 500 is at one of the highest values of the year. As a result, when the stock market rises, bitcoin often follows suit, and the opposite is also likely to occur.

S&P 500 and BTC Correlation

Source: Tradingview.comAugust could be “really black for crypto,” Roman Nekrasov predicts. “I wouldn't be surprised if bitcoin fell to $15 000, or maybe even $13 000, and held at that level for a while.” At the same time, according to the expert, unlike the real estate market, to which he predicts a deflation, bitcoin will recover faster from the effects of high inflation in the United States. “After falling by the end of the year, BTC may well return to $50 000. However, it depends very much on the US consumer price situation and the Fed's actions. I think there is no need to wait for a new bullish cycle until the end of 2023,” Nekrasov says.

According to Sergey Mendeleev, it is already obvious that inflation cannot even be slowed down in spite of all the measures that are being taken. This could lead to a further increase in rates to 5-6% as early as this fall, which will inevitably hit the markets. “So I would prepare for a plunge to a new bottom, unless Covid is accidentally crossed with another monkey pox and, under this sauce, they ask everyone to be patient a little longer,” Mendeleev writes in his Telegram channel.

“Right now the crypto sector is in the accumulation stage, so the rate of cryptocurrencies may remain unstable, but that does not mean it is impossible to make money on it,” reassures Gleb Jout. According to Bitget CEO, when it comes to investments, an effective strategy in the current situation would be to periodically average positions in bitcoin and, for example, Ethereum in order to keep investments in established assets for the long term.